CURB SMUGGLING TO MAKE CARS AFFORDABLE

SHABBIR H. KAZMI
(feedback@pgeconomist.com)
Nov 15 - 21, 20
10

There cannot be two opinions that automotive prices have become unaffordable in Pakistan. Frequent hike in prices and unwillingness of the financial institutions to offer auto financing do not bode well for the assemblers. Plunging of capacity utilisation to nearly 50 percent have dampened outlook of the industry. Though some of the quarters are suggesting allowing import of secondhand cars, which seems 'out of frying pan into the fire'. This attempt could pose even worse problems for the assemblers.

Let it be very clear to the policy planners that prices are unaffordable without auto financing. In the recent past auto sales were high only because financial institutions were more than willing to extend credit for auto purchase. However, due to rising delinquencies and enhanced government borrowing banks seem no longer interested in auto financing.

Factors affecting auto financing included rising interest rate, eroding purchasing power and on top of every thing the attitude of recovery staff of financial institutions. According to banking sector experts, high delinquencies were mainly because of indiscriminate and imprudent lending by the financial institutions, but the borrowers pay the cost. Since sales were on the rise financial institutions became a little reckless in credit approval. However, as the delinquencies rose financial institutions not only became extra careful but also preferred not to entertain the retail customers.

The experience of financial institutions in auto finance has not been very encouraging. Public transport has mostly remained an untouchable entity, partly because of high delinquencies, mainly arising due to imprudent lending and public transport being the victim of most corrupt bureaucracy. Over the last two decades, repeated efforts have been made to ensure financing for public transport but most of the schemes have proved disastrous for the financial sector.

Historically, public transport has remained confined to informal lending. Neither the lenders nor the borrowers wish any change in the system despite the worst exploitation. Formal channels have not been successful because of 'transport mafia' that includes owners of public transport, lenders, traffic police, and regional transport authorities.

Financial institutions have been forced to charge high interest rates due to a number of factors. Most of the delinquent loans can be termed 'forgery' because financing is acquired by submitting 'tempered' documents. All the attempts to bring auto financing under the formal banking system have proved most frustrating experience.

There is often a debate that import of secondhand cars can help in bringing down prices. Ideally, import of secondhand cars should have helped in bringing down prices of locally assembled cars but experience has been contrary. The country has experienced many debacles where both the government and the buyers emerge as losers. The government was deprived on revenue and buyers were provided obsolete models and the schemes added to the junkyards.

Unless an appropriate policy is prepared for the import of secondhand cars all the stakeholders will emerge as losers. The government must decide maximum age of vehicles and the quantum of spare parts to be imported. Historically, smuggling has proved to be the worst enemy of local manufacturers of parts and accessories. Most of the consignments are declared 'scrap' but comprise of new parts to evade payment of duties.

Replacement market should have been the major buyers of locally produced parts and accessories but the experience is contrary. Since most of the plants operate at nominal capacities neither cost optimisation nor could economies of scale be achieved.

Indigenisation should have played the key role in optimising cost by following Indian experience. Since Pakistan has failed in developing heavy as well as light engineering, it has remained heavily dependent on imported components. On top of this failure in restricting model change and variants allowed the assemblers to even indulge in 'transfer pricing'. For decades cars were produced following 'minimum acceptable standards' rather than 'international standards'. It is because of this that people prefer to buy foreign assembled car rather than a locally assembled one. Though lately some effort has been made to follow the international standards but the policy remains mostly confined to expensive cars. Customers are still not happy with the quality of below 1000cc models.

The blame for not following international standards goes to government policy regarding transfer of technology as well as the tariff structure. Often using an imported component is cheaper than buying a locally made one. It may be true that local manufacturers of parts and accessories are not very efficient but the blame has to be shared by the local assemblers.

Historically, car premium has remained a big attraction for the investors. Some of the experts attribute this to connivance of dealers with the assemblers. It is worth noting that despite assembly plants operating at less than 50 percent capacity utilisation delivery period still stretches to more than a month. One could see hundred and thousands of cars parked at the showrooms, being sold with premium. However, assemblers attribute price difference to depreciating rupee.

Exporting cars could help in improving capacity utilisation of local assembly units. However, the objective could not be achieved without cooperation of all the stakeholders. Government has to offer incentives, assemblers will have to be more efficient and manufacturers of parts and accessories more quality conscious. The first step for achieving greater synergy is stopping smuggling of parts and accessories under the disguise of 'scrap'. It should be made mandatory for all the assemblers to export five percent of total output.